An Introduction of Blockchain Technology and Its Legal Issues

Blockchain technology has become a recent hot topic in finance. It is considered one of the main driving forces behind global economic growth that will completely change the landscape of the financial industry. The blockchain can be traced back to the concept Satoshi Nakamoto proposed in his article “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008, and formed the technological basis of bitcoin. However, this does not mean the blockchain and bitcoin need to rely on each other. In fact, while the blockchain is generally viewed as a decentralized information storage tool (like a database), bitcoin only serves as one of the applications. The blockchain offers a decentralized and trustless technical approach for collectively maintaining a reliable database.

The blockchain is not a single technology. Instead, it combinesvarious interdisciplinary technologies intersect, including mathematics, cryptography, algorithm, etc. Incorporating a peer-to-peer network, the blockchain is a technical solution where trust can be established by mathematical foundations and network data can be stored, validated, transmitted and exchanged through self-distributed nodes. From a financial accounting standpoint, the blockchain can be viewed as an open and distributed ledger that can efficiently record transactions between both parties with a verifiable and permanent approach for recording. Therefore, the blockchain has, among others, features of “decentralization,” “openness,” “encryption security” and “anonymity.”

Decentralization is the core of the blockchain. This technology does not rely on third party administration or hardware: there is no central administration. Thus, the data on every blockchain is stored on separate clouds. Validation and storage are done via a distributed approach. Every node requires self-validation, transmission and management. Using a bitcoin transaction as an example, when a transaction is generated through a node, this transaction is announced to the other participating nodes. Each node determines who can validate this transaction (e.g. timestamp) in accordance with the calculations fromproof of work (POW). For example, the node that can solve the problem generated by the Cryptographic Hash Function the quickest can be used to validate this transaction and then transmit it to the other nodes. When the other nodes successfully validate this block’s transaction, the data will be written into the blockchain. Since the data or transaction on the blockchain uses distributed algorithms, the data on the blockchain cannot be altered as long as no one can control over fifty percent of the nodes. This way, blockchain usage can be relatively secure. Moreover, since each node’s identity does not need to be made public or validated, unless otherwise stipulated by law, data can be transmitted anonymously.

In finance, the blockchain can be used in fund transfer, trade finance, identity verification, transaction settlement, insurance, etc. Besides finance, the blockchain can also be used in medical care, the Internet of Things (IoT), public service, digital copyright and other areas. Although blockchain technology still has many issues (e.g. the more users there are, the slower it gets), data processing is expected to speed up with the foreseeable technical advancement so that blockchain's influence is going to be even more far-reaching.

The application of blockchain technology will inevitably involve many existing and new legal issues. The anonymity of the blockchain is a case in point here because it involves user identity articulation, publicly disclosed issues, as well as the legality of data disclosure and retention. Moreover, a number of issues with blockchain technology and application on intellectual property stillawait further solutions. Using patents as an example, since the blockchain is founded on mathematics, cryptography and algorithms, attention needs to be paid to how the patent is written when attempting to protect the underlying foundation of the blockchain lest it should be viewed as a mathematical approach or software which, in turn, would affect patent eligibility. Blockchain application usually involves business methods, yet patent offices in various countries determine the patentability of business methods based on different standards. Thus, patent drafting and prosecution strategies should be carefully formulated lest the claimed subject matter should be deemed patent-ineligible.